In your column last week you quoted a fund manager who said investors should have no more than 20 per cent of their equity portfolio in bank stocks. How can I determine my total exposure to banks if I own both individual bank stocks and funds that invest in them?
First, keep in mind that the 20-per-cent limit is just one fund manager's opinion. If your exposure is slightly higher or lower than that, don't worry. Generally, you should aim for a weighting that lets you participate in the solid returns that banks have generated historically, while limiting your risk should they run into trouble from a housing bust or some other unforeseen event.
The first step in calculating your bank exposure is straightforward: Add up the market values of all the individual bank stocks you own.
For example, if you hold 500 shares of Toronto-Dominion Bank, 350 shares of Bank of Montreal and 400 shares of Royal Bank, then your bank stocks would be worth about $104,000 (based on prices at mid-day Friday).
Figuring out the bank exposure of your funds takes a bit more leg work. Most exchange-traded funds disclose their holdings on a daily basis, so you can go to the ETF provider's website and tally up the percentage weightings of the banks the fund holds.
(Tip: Don't rely on the fund's published weighting in "financials" as this also includes insurers and asset managers.) Mutual funds also disclose their top 10 or top 25 holdings and respective weights.
As an example, Canada's biggest ETF – the iShares S&P/TSX 60 Index ETF (XIU) – owns the six largest Canadian banks, which together account for nearly 30 per cent of the fund. If you hold 2,000 units of XIU with a market value of about $46,300, then your bank exposure from XIU would be about $13,890 (0.3 times $46,300).
Say you also own 2,000 units of another ETF, the FTSE Canadian High Dividend Yield Index ETF (VDY), and those units have a market value of about $66,840.
Banks accounted for a whopping 49.8 per cent of the fund as of March 31, so your bank exposure through VDY would be about $33,286 (0.498 times $66,840). VDY's bank weighting may have changed slightly since the last update, but we don't need exact numbers for this exercise.
Finally, let's assume you also own a bunch of other non-bank stocks and your equity portfolio is worth $500,000 in total. Your exposure to banks – from individual bank stocks and your two ETFs – would be $151,176 ($104,000 plus $13,890 plus $33,286), which works out to slightly more than 30 per cent of your equity portfolio.
In Canada, bank stocks are everywhere and in quantities you may not realize.
By performing this exercise you'll get a handle on your actual bank exposure, which will help you determine whether it falls within your own comfort zone given the rewards – and risks – these stocks entail.
I have followed your Strategy Lab model dividend portfolio closely and been happy with the results. I have some additional cash to invest and I was wondering if there is any one stock that you consider especially attractive at this time?
First, I want to stress that my model dividend portfolio is meant to be a source of ideas and an illustration of how dividend investing works; it is not meant to be copied exactly. The portfolio is limited to 12 securities, which does not provide adequate diversification.
Furthermore, there are lots of great dividend stocks out there that did not make it into the portfolio simply because there wasn't room.
In my Yield Hog columns, I frequently profile dividend stocks – some that are included in the model portfolio and others that aren't – and those columns are the best place to find out what stocks I consider the most attractive at any point in time, based on my own research and the views of analysts and portfolio managers.
Finally, it's important to understand that, although the portfolio has done well relative to Canada's benchmark index, I am certainly not infallible. That's why I always encourage readers to do their own research before investing in any security.